China's stock markets vote yes on Third Plenum reforms

The early vote from China’s stock markets is in: The new policies sketched in at the recently ended meeting of the Communist Party’s Central Committee get a thumbs up.

More details on the policies were announced this past weekend. And today Hong Kong’s Hang Seng index closed up 2.73% and the Shanghai Composite rose 2.87%

The new details, in a 60-page document, follow on the vague outlines of new policies announced at the end of the meeting on November 12. Going into what’s called the Third Plenum, the third meeting during this central committee’s five-year life, investors and analysts were uncertain whether or not the financial markets would find the new policies too vague and disappointing or would decide that they paved the way for real change. Today’s market reaction points strongly toward the latter “enthusiastic” direction.

What’s behind this enthusiasm? Policy “directions” that point to efforts to accelerate the convertibility of the yuan and that would move toward interest rates set by the market; to improve the efficiency of state-owned enterprises; to speed up work on a registration system for initial public offerings; to allow private investors to set up small and mid-size banks and increase the use of the stock and bond markets in raising capital; and to give the markets a bigger role in setting prices in the economy.

But the two biggest proposals, the ones that I think are actually driving market enthusiasm even though they aren’t explicitly financial, are changes to the one-child rules and to the migrant worker system. Both are being seen in China as signs that the new leadership is determined to make big changes in China’s economy and society.

Under current policy, a couple can only have a second child if both parents are only children. The new policy, to be implemented by 2020, would allow a couple to have a second child if either parent is an only child. (Under current policy most rural couples are already allowed to have two children, the rules say.)

The proposed changes to the migrant worker system are much more extensive. The changes will make it easier for rural migrant workers to obtain full rights to basic public services including housing, health care, and education in the cities were they work. According to current policy, a system called hukou, rural migrants remain registered in their places of origin and are granted access to very few services in the cities were they work.

Implementing all these changes is likely to take some time since what the central government proposes, local governments have to put into practice

But today China is bubbling with a sense of possibility. And investors are looking for ways to make money from the changes by investing in consumer-focused companies, and in insurance and securities companies. In Hong Kong today big winners include retailer Hengan International (10.44.HK), up 6.55%, and China Life Insurance (2628.HK in Hong Kong and LFC in New York), up 8.71%.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , I liquidated all my individual stock holdings and put the money into the fund. The fund did own shares of Hengan International as of the end of June. For a full list of the stocks in the fund of the end of June see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/